How Perpetual Futures Markets Determine Bitcoin and Ether Prices

The process of setting cryptocurrency prices is often misunderstood, with many believing it occurs through spot trading. However, perpetual futures, also known as perps, have become the primary driver of price discovery for bitcoin, ether, and the broader crypto market. These contracts, which never expire, account for roughly 93% of all crypto futures volume and are highly leveraged. Research has shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. A recent example of this is the pricing of SpaceX's initial public offering, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The perps market was able to price demand for the stock, but was blind to the supply of locked-up insider shares, which became eligible to sell after the IPO. This example demonstrates the significant influence of perpetual futures on cryptocurrency markets and highlights their role in determining prices.